World markets are facing a simple but serious problem: There just aren’t enough dollars to execute trades and transactions.
That explains why the trade-weighted dollar index, gained more than 4% last week. Given the scarcity of dollars, the U.S. Federal Reserve last week announced that it set up financing channels with nine other central banks, including the Reserve Bank of Australia and Monetary Authority of Singapore, to stabilize currency markets.
That opened access to $450 billion of additional dollar funds, with a commitment to keep the arrangement in place for at least six months.
Khoon Goh, head of research at Melbourne-based ANZ Bank, thinks the greenback will rise to 105 on the dollar index in the short term. As of Tuesday it stands near 102, and last was at 105 in late 2002.
“The swap lines will help to some extent. However, it is unlikely to be sufficient given the extent of dollar demand. From a technical perspective, the dollar looks overbought, so some consolidation can be expected. However, this is likely just a pause before another push higher,” Goh told CNBC in an email.
The Fed announced open-ended additional stimulus on Monday, and Goh acknowledged that some steam came off the dollar rally.
“We will probably see the greenback consolidate for a while, but the key will be how other major central banks respond as well,” he said. “If the (European Central Bank) and (Bank of Japan) also start to announce more measures of their own, that could still push the dollar index toward 105 over the short term.”
The dollar spike isn’t surprising given extreme market volatility and investor fears that go along with it. But a number of aspects to the rise are worrying some analysts:
- Bad news for emerging market assets
- Negative for US exports
- Top reserve currency of the world
- Euro-dollar parity